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E-cig market gets shakeup with top brand's sale

A shrinking tobacco industry

Cigarette maker Reynolds American Inc. has announced plans to buy rival Lorillard Inc. for about $27 billion in a deal that would combine two of the nation's biggest tobacco companies.The deal would create a formidable No. 2 to rival Altria Group Inc., owner of Philip Morris USA, and will likely face scrutiny from regulators.

Competition in the electronic cigarette market, which has boomed into a billion-plus dollar industry, could intensify as tobacco maker Reynolds American said Tuesday that it will boost production of its new e-cigarette.

Reynolds is confident enough of VUSE, its battery-powered device launched last year and rolled out nationally in June, that it's agreeing to sell the top U.S. e-cigarette brand — Blu eCigs — as part of its $27.4 billion purchase of rival Lorillard.

Lorillard will sell Blu eCigs, touted in sexy TV ads by actor Stephen Dorff and former Playboy model Jenny McCarthy, to Imperial Tobacco if its acquisition wins federal approval. It bought Bluin 2012 and says it had a 47% share of the U.S. electronic cigarette market last year. Imperial said it plans to use its "e-vapor know how" to "internationalize" the brand.

Reynolds, the second-largest U.S. tobacco company, said it will ramp up VUSE's growth. It said the device grabbed two-thirds of e-cigarette volume in its Colorado test market this year. Electronic cigarettes heat a nicotine liquid into vapor that's inhaled or "vaped."

"Our objective is to become the vapor authority," Reynolds' CEO Susan Cameron told CNBC. Cameron said VUSE is "selling very quickly" and offers "superior technology."

Some analysts agree. "We see VUSE as best-in-class," said Vivien Azer, tobacco analyst at Cowen, noting that the brand's price and performance also helped it take market leadership in Utah, where it debuted in January.

Reynolds' plan to sell Blu surprised some experts in the tobacco industry but CLSA analyst Michael Lavery sees it as Reynolds' "vote of confidence" in its own brand. Still, "I don't think it changes anything for e-cigarettes," Lavery said.

The nation's largest tobacco company, Altria Group, is also rolling out nationally its own e-cigarette brand — MarkTen — in August after testing it in Indiana last year.

Yet in a diffuse market, both newcomers are distant competitors so far to the only dominant brand — Blu, which accounts for about 40% of e-cigarettes sold in convenience stores. Blu's sales nearly doubled in the last year despite an 11% dip in the most recent four-week period tracked, according to Nielsen and Wells Fargo data.

Lorillard says Blu had $226 million in sales and $7 million in operating income last year.

E-cigarettes, a tiny but growing share of the $94 billion U.S. cigarette market, have sparked virulent debate about safety. They don't have as many harmful chemicals as conventional cigarettes, which they often resemble, but they contain nicotine, which is addictive and derived from tobacco leaves. Supporters say they help smokers kick the habit, but critics say they enable users to avoid smoke-free laws and may lure children into a tobacco addiction.

In April, the Food and Drug Administration proposed rules to ban their sale to minors as well as require ingredient disclosure and warning labels. The FDA, though, did not seek to ban flavors such as bubble gum, Internet sales to adults or, unless health claims are made, TV ads.